Are Bank Loan Ratings Relevant?

45 Pages Posted: 15 Jan 2004

See all articles by Donald J. Mullineaux

Donald J. Mullineaux

University of Kentucky - Gatton College of Business and Economics

Ha-Chin Yi

Texas State University, San Marcos - Department of Finance and Economics

Date Written: December 11, 2003

Abstract

We analyze the relatively new phenomenon of ratings on syndicated loans. We examine whether credit ratings on these loans convey information to the capital markets. Our event study results show that while initial ratings and upgrades do not inform the market, downgrades do. The market anticipates loan downgrades to some extent, however. We also examine whether a set of observable variables reflecting the default characteristics of the borrower can explain the cross-sectional variation in syndicated loan ratings and find that ratings are only partially predictable. Our evidence also suggests that the loan and bond rating processes differ. Finally, we estimate a credit spread model incorporating bank loan ratings and other factors reflecting default risk, information asymmetry, and agency problems. We find that ratings are related to loan rates, given the impact of other influences on yields, suggesting that the rating agencies provide information not reflected in financial information. In particular, ratings may capture information about recovery rates in default. Our results also reveal that the borrower's equity volatility affects loan ratings and the credit spread, the latter result confirming the findings of Campbell and Taksler (2003) for the bond market.

Keywords: Credit Risk, Credit Rating, Bank Loans

JEL Classification: G12, G14, G32, H25

Suggested Citation

Mullineaux, Donald J. and Yi, Ha-Chin, Are Bank Loan Ratings Relevant? (December 11, 2003). Available at SSRN: https://ssrn.com/abstract=478770 or http://dx.doi.org/10.2139/ssrn.478770

Donald J. Mullineaux (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-2890 (Phone)
859-257-9688 (Fax)

Ha-Chin Yi

Texas State University, San Marcos - Department of Finance and Economics ( email )

601 University Drive
San Marcos, TX 78666
United States
512-245-3251 (Phone)

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